Don't let it get away!

Zillow (NASDAQ: Z) is one of the largest online and mobile marketplaces for real estate and homes. Yet, some investors are concerned that competitor Trulia (NYSE: TRLA) will overtake Zillow's market share. While you should be mindful of the competition, I believe folks are underestimating Zillow's leadership, strategy, and overall strength as a business.

Zillow grew sales 69.05% in 2013 to $197.54 million and has expanded sales at an average annual pace of 59.57% since 2010. Not too shabby, and I think there is more to come. Here are three reasons why I think Zillow is slated to continue delivering market-beating returns over the long haul:

1. Excellent leadership35-year-old Zillow CEO Spencer Rascoff, one of the founding employees of Zillow in 2005, has a 98% employee approval rating on Glassdoor. Zillow as a whole receives a 4.2/5 rating from employees on Glassdoor.

Trulia's 38-year-old co-founder, chairman, and CEO Pete Flint receives an 80% employee approval rating, and Trulia has a 3.6/5 employee rating on Glassdoor. While Trulia's reviews are hardly dismal, a determined Rascoff is leading the charge with a very enthusiastic base of employees at Zillow.

If Peter Drucker is indeed correct that culture eats strategy for breakfast, Fools ought to prefer Zillow over Trulia.

Rascoff also shared just how effective Zillow has been at generating traffic (and, in turn, sales):

According to comScore, we are now nearly twice the size of our two closest competitors on combined mobile and Web traffic. And, we're growing faster – on desktop, comScore shows Zillow tripling our category lead in 2013.

The biggest strategic difference between Zillow and its rivals is Zillow's focus on reaching a wider consumer audience, rather than focusing on professionals such as real estate agents, landlords, brokers, and lenders. The reasoning behind this strategy is fairly simple: the larger the consumer audience, the bigger draw for advertisers to utilize Zillow's site. If comScore's data is any indication, Zillow is crushing the competition in terms of audience reach.

This is really a "what comes first" sort of question: does a wider consumer audience attract more professional advertisers, or does first appealing to professional advertisers lead to a wider consumer audience? Zillow is operating with the understanding that cultivating a larger consumer audience through its mobile and web outlets will attract more professional advertisers.

Other companies, such as Trulia, are operating under the assumption that first appealing to the professionals will, in turn, lead to a more successful outcome in terms of consumer reach and sales. While neither strategy is necessarily right or wrong, Zillow's financial results reinforce what it's doing when compared to Trulia.

3. Zillow's superior cash flow productionWhile Zillow's cash flow production decreased slightly to $31.30 million in 2013, the company has expanded operating cash flow production at an average annual pace of 92.91% since 2010. This, along with a stock issuance in 2012 and 2013, has helped the company build a cushion of $295.29 million in cash with no debt.

The most cash flow Trulia has been able to produce, was $4.15 million in 2012, and that number turned negative in 2013. Trulia has $225.6 million in cash, but also carries a debt load totaling $230.08 million.

Trulia has grown sales at an impressive average pace of 64.16% annually since 2010 to $143.73 million in 2013, but that growth hasn't translated into cash flow production. This has pressured the company to issue extensive amounts of stock and debt over the past two years, with no improvement in cash flow production to show for it.

Foolish bottom lineZillow will undoubtedly be a volatile stock going forward, with a P/S ratio currently nearing 16. However, the company is guided by Spencer Rascoff, a young and innovative leader, who oversees one of the top company cultures in the country. Zillow's focus on building a service that attracts a wider consumer audience has proven to be an effective strategy, and the company has done a great job translating ever-expanding customer visits into consistent sales growth and cash flow production.

As Rascoff explained in the fourth quarter conference call:

55% of new sales bookings in the fourth quarter went to existing agents buying more impressions across mobile and Web, which is higher than recent trends and signifies strong underlying demand.

In other words, Zillow's strategy is working. This isn't to say that Trulia or other players cannot succeed as well, but Trulia hasn't been able to prove it can actually make money or generate cash with its strategy. Zillow has a proven strategy that is already leading to solid financial performance, which gives me confidence that the company can continue to outpace the market.

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Comments from our Foolish Readers

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its incredible how the SEC doesnt shut down your site, you guys OWN SHARES OF ZILLOW, and continue to write pump up stories with little to 0 facts every week, unbelievable.

Please answer me why anyone in their right mind would pay $90 a share, for a company that has:

1. more outstanding shares

2. had a huge head start (years, exposure everywhere...), but only have about 50M more in yearly revenue

3. same negative return on assets, same negative return on equity...Trulia is atleast closing that gap, Zillow is going the other way, going more negative

4. trulia is quickly gaining in website hits and subscribers, infact almost as many subscribers, and up to nearly the top 100 site in the US while Zillow is still hovering around 50 something with its great head start

5. Now taking some MOVE inc executives is going to bring on atleast one lawsuit (announced today) and possibly more

so tell me, with a negative P/E, huge P/S, P/B...huge forward P/E, unstable housing market, tell me how anyone in their right mind would pay this much money for a stock???

if youre going to be crazy enough to go long in this middle man, unstable industry, atleast buy the one thats 3 times cheaper....

btw the only reason why Zillow is this hi, is due to a huge short float, and short squeezes brought on by small firms that have their price targets for zillow at 100, thats in my opinion ofcourse...

I put off refinancing my house at a really good rate because I was relying on Zillow's 'zestimate'. Zillow was saying my house was worth less than 100k, but I decided to go for a refi that offered a free appraisal, just in case. They appraised my house at 130k and I was able to eliminate my mortgage insurance and cash out some money for solar to eliminate my electric bill. It's a good thing I was also looking at Trulia, which was pretty much right on the money and gave me the idea that I had enough equity to go for it. I f I was going by Zillow, I'd still be sitting here twiddling my thumbs waiting for my home value to increase.

I'd be fascinated if the Glassdoor ratings correlate with stock returns over time. I like the hypothesis, but is there a threshold? Is 98% approval better than 80% for returns? Maybe it's inversely correlated, if I have to cut a bunch of unfocused stuff. Maybe 60%, ala Rotten Tomatoes, is sufficient for good returns?

Also, not to take anything away from Rascoff, but the founding team from Zillow (Barton et al) is also the founding team at Glassdoor.

Anyway, might be a little risky to use that data to support your conclusion.

Trulia does not allow FSBO to post and Zillow does. Big mistake by Trulia. According to the Oxford study just released, 97% chance real estate agents/broker will be eliminated. According to the National Association of Realtors, each month another 5,000 agents leave the business. Even travel agents didn't die this fast.

Sending report...

David started investing in stocks when he was 12 years old and has been a Fool ever since. He is a graduate of Berea College and a member of the Motley Fool's Analyst Development Program, currently serving as an analyst in Rule Breakers and Supernova. Follow David on Twitter @David_Kretzmann.